Government Contracts & Investigations Bloghttps://www.governmentcontractslawblog.com
Latest updates on Developments Affecting Government Contracts & InvestigationsWed, 22 May 2019 17:06:57 +0000en-UShourly1https://wordpress.org/?v=4.9.10Subscribe with My Yahoo!Subscribe with NewsGatorSubscribe with My AOLSubscribe with BloglinesSubscribe with NetvibesSubscribe with GoogleSubscribe with PageflakesNew Executive Order To Further Restrict Business with Huawei and Other Foreign Adversaries Engaged in Cyber Espionagehttp://feeds.lexblog.com/~r/GovernmentContractsBlog/~3/sOBQKlHaEyw/
https://www.governmentcontractslawblog.com/2019/05/articles/cybersecurity/eo-restrict-business-cyber-espionage/#respondMon, 20 May 2019 17:13:17 +0000https://www.governmentcontractslawblog.com/?p=3284Continue Reading]]>On May 15, 2019, President Trump issued an Executive Order (“EO”) targeting activities of certain foreign telecommunications companies based in hostile countries. Entitled “Securing the Information and Communications Technology and Services Supply Chain,” the EO declares a national emergency based on a Presidential finding that “foreign adversaries are increasingly creating and exploiting vulnerabilities in information and communications technology and services … in order to commit malicious cyber-enabled actions” rising to the level of “an unusual and extraordinary threat to national security.”[1] As a result, the EO allows the Federal Government, led by the Secretary of Commerce, to bar U.S. companies from doing business with foreign entities it determines are contributing to the threat. For more on this issue, see our Global Trade Law blog posting here.

Although the EO does not identify specific countries or entities, it sets up a system for key government agencies to target them. Further, it became clear after the EO was released that the action is aimed at Huawei and other Chinese companies in particular. The Department of Commerce already has announced that Huawei and 68 non-U.S. affiliates of Huawei will be added to the Bureau of Industry and Security Entity List, which means a specific license will be required to do business with these entities.

The EO prohibits the “acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service” (defined as a “Transaction”) where the Transaction:

• involves property in which any foreign country has an interest;
• is initiated, pending, or to be completed after May 15, 2019 (the date of the EO); and
• the Secretary of Commerce, in conjunction with the heads of other executive departments and agencies, determines:

the Transaction involves information and communications technology or services developed or supplied by persons subject to a foreign adversary; and the Transaction:

“poses an undue risk of sabotage” to information and communications technology or services in the U.S.; or

“poses an undue risk of catastrophic effects on the security or resiliency of United States critical infrastructure or the digital economy”; or

otherwise poses an unacceptable risk to national security.

In addition to the above determination, the EO also authorizes the Secretary of Commerce to direct the timing and manner of cessation of prohibited Transactions, as well as adopt rules and regulations which, among other things, determine the particular countries or persons to be considered foreign adversaries under the EO and identify particular services and technologies warranting scrutiny. The EO requires publication of such rules within 150 days of the issuance of the EO.

Furthermore, the EO tasks two additional heads of Executive agencies with certain duties. The Director of National Intelligence is directed to assess threats to the United States from information and communications technology or services connected to foreign adversaries, and provide an initial assessment within 40 days, and annually thereafter. The Secretary of Homeland Security, meanwhile, is directed to provide an assessment of entities, hardware, software, and services that pose “the greatest potential consequences to the national security of the United States,” and produce a written assessment within 80 days, and annually thereafter. Finally, the Secretary of Commerce is tasked with providing a report by May 15, 2020 assessing the sufficiency and necessity of actions taken under the EO.

The full impact of this EO remains unclear, as does the interplay between the EO and Section 889 of the National Defense Authorization Act (NDAA) for Fiscal Year 2019, which called on agencies to restrict contract activities with companies that use certain Chinese telecommunications equipment or services as a substantial element of their business. NDAA Section 889 was discussed in our previous blog post on this topic. We will continue to monitor this situation closely.

[1] “Foreign adversary” is defined as “any foreign government or foreign non-government person engaged in long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or security and safety of United States persons.”

]]>https://www.governmentcontractslawblog.com/2019/05/articles/cybersecurity/eo-restrict-business-cyber-espionage/feed/0https://www.governmentcontractslawblog.com/2019/05/articles/cybersecurity/eo-restrict-business-cyber-espionage/The Government’s Playbook – Your Guide to Uncle Sam’s Negotiating Techniqueshttp://feeds.lexblog.com/~r/GovernmentContractsBlog/~3/0xP4Qdbx2Dw/
https://www.governmentcontractslawblog.com/2019/04/articles/department-of-defense/governments-playbook-negotiating-techniques-rule/#respondMon, 29 Apr 2019 22:57:38 +0000https://www.governmentcontractslawblog.com/?p=3282Continue Reading]]>If you follow professional football, you are familiar with the message generally given to an aspiring player just before he is cut – “Coach wants to see you. Bring your playbook.” The playbook, that step-by-step guide to on-the-field success, is something that teams guard zealously.

Not all teams, however, maintain the secrecy of their playbooks, and the U.S. Government is a case in point. The Government actually publishes its playbook of bargaining techniques recommended for its contract negotiators. Like the Commandments Moses brought down from Mount Sinai, the Government playbook consists of 10 Rules. These Rules can be found in Chapter 6 of Volume 5 of the DoD’s Contract Pricing Reference Guides. The Rules are all reasonable and, in many ways, predictable. Because “Forewarned is forearmed,” here they are –

Rule No. 1 – “Be Prepared”

It is difficult to characterize the motto of the Boy Scouts as unreasonable and let’s face it – if you enter negotiations less prepared than the Government, shame on you.

One problem that confronts contractors, however, is that in many negotiations, particularly negotiations relating to Government claims, audits, cost disallowances, and CAS noncompliances, the issues are only raised by the Government well after the fact. This makes preparation difficult, because decisions relating to these issues may not have been well-documented in real time and decisionmakers may have moved on in the interim, leaving little if any institutional knowledge of the who, what, when, and why of long past decisions. Contractor negotiations will always be more effective if the “preparation” includes a standard operating procedure of adequately documenting significant decisions in real time and maintaining those records for ready access and future use.

Rule No. 2 – “Aim High”

The Government is no different from the contractor in this regard, seeking to maximize the outcome of the negotiation. Unlike the Government, however, contractors operate under some statutory constraints – with severe penalties – when deciding just how high they can aim. The Government’s “Aim High” stricture purports to be based on empirical evidence that a negotiator’s expectations strongly influence the outcome of the negotiations. Negotiators who dwell on the weaknesses of their position often fall victim to the “Aim High” approach of their counterparts, and vice versa. It may sound hokey, but the Reference Guide cites Norman Vincent Peale’s “The Power of Positive Thinking” in support of this Rule.

Rule No. 3 – Give Yourself Room to Compromise

This is the obvious corollary to Rule No. 2. The higher your initial aim, the more room you have to lower your sights. And, if your first offer is your final offer, there really is not any room for negotiation at all. The Reference Guide advises Government negotiators to compromise in a series of pre-planned steps, i.e., “a variety of positions that will permit you to demonstrate a range of apparently fair and reasonable positions.” Some contractors may raise an eyebrow at the adverb used here – “apparently” fair and reasonable. In any event, if the Government adheres to Rule No. 3, do not expect the negotiations to conclude swiftly.

Rule No. 4 – Put the Pressure on the Contractor

Surely this comes as no surprise to anyone. The Government holds virtually all the cards in this respect. Contractors operate at a distinct disadvantage here, and the Government knows it.

The only pressure the contractor can put on the Government is to walk away from the deal. While that can work – theoretically – when negotiating to create a new contract, the thirst for new business often eliminates this option as a practical matter. And once under contract, in a claims or audit context, the contractor has no real “walk” option, given the duty to proceed and/or the fact that costs under DCAA challenge already have been incurred. The Government, by contrast, will be sensitive to and will seek to capitalize on the pressures affecting contractors, such as the importance of booking the business, the desire to maximize revenue at certain annual milestones, or the contractor’s justifiable concern over self-funding of an unresolved change for years while litigators engage in a seemingly endless disputes process. And so, the Government will often advance positions that have been squarely rejected by courts and boards, ask for endless rounds of marginally relevant documents, plead “program poverty,” and wax eloquent about the criticism it will receive from “upstairs” if it accedes to your position, no matter how well-founded it may be.

Rule No. 5 – Do Not Volunteer Weaknesses

Contractors often think that a frank recognition of weaknesses will demonstrate good faith and hasten a reasonable outcome. That approach will not be reciprocated. The Guidelines instruct negotiators as follows – “Never volunteer information that would weaken your negotiating position.” The Guidelines further suggest the avoidance of known weaknesses in the Government’s position “by carefully worded statements or by avoiding a direct response to a direct question.” The line between accuracy and inaccuracy when pursuing this stratagem can often be elusive and, unlike the Government, contractors can suffer severe consequences when failing correctly to toe that line. When trying to capitalize on what you know to be a Government weakness, thus, listen to the Government’s answer, do not accept a non sequitur response, and rephrase your questions until you do get a direct answer.

Rule No. 6 – Use Concessions Wisely

Here is an obvious supplement to Rule No. 3, “Give Yourself Room to Compromise.” The strategy here is never to concede too much too soon or all at once, to offer concessions as if you are peeling an onion, to isolate individual concessions in your counterpart’s mind so that the total appears to be more than the sum of the individual concessions, and always to extract something more in exchange for each onion peel.

Rule No. 7 – Say It Right

Rule No. 7 has to do with “style,” e.g., listening politely, permitting the counterparty to speak without interruption, avoiding the personalization of the discussions by referring to the contractor (the “XYZ Company”) as opposed to negotiator (“you”), and maintaining a calm demeanor and a modulated voice. The Rule subscribes to the well-worn maxim about flies, honey, and vinegar.

Rule No. 8 – Satisfy Non-Price Issues

In the end, all open issues need to be resolved. There may be, on occasion, non-price issues that can be resolved before pricing, but most negotiations regarding disputed matters turn, ultimately, on price. As H.L. Mencken so aptly put it, “When somebody says it’s not about the money, it’s about the money.”

Rule No. 9 – Use the Power of Patience

This Rule is a natural extension of Rule No. 4, and any contractor that has attempted speedily to definitize an undefinitized contract action has felt its effects. The operative assumption is that the longer it takes to get to “Yes,” the more favorable that “Yes” will be for the Government, because – outside of the contract formation setting where an award schedule is usually in place and expiring funds can come into play – the Government will often be holding the money and/or the contractor will be spending its own money without reimbursement. That pressure can make time the Government’s most potent ally. As Canadian novelist Janette Oke has said, “Impatience can cause wise people to do foolish things,” and the Government counts on that possibility. See Rule No. 4 above. It is incumbent on contractors, in response, to practice their own brand of patience, even if that patience is, as defined by former Apple executive Guy Kawasaki, “the art of concealing your impatience.”

Rule No. 10 – Be Willing to Walk Away From or Back to Negotiations

If Rule No. 4 is “Put the Pressure on the Contractor” and Rule No. 9 is “Use the Power of Patience,” does Rule No. 10 come as any surprise? While it is true that intervals between negotiating sessions provide an opportunity for reflection, for the collection of further support for your position or to answer Government questions, or simply for some “cooling off” before rejoining the fray, at the end of the day contractors often conclude that no matter how many rounds they go, the match will never end. Remember, interest on a contractor’s claim does not accrue until it has filed a certified claim, so time has an opportunity cost for contractors. At some point, the contractor may well be forced to conclude that “This is why God invented the courtroom.”

]]>https://www.governmentcontractslawblog.com/2019/04/articles/department-of-defense/governments-playbook-negotiating-techniques-rule/feed/0https://www.governmentcontractslawblog.com/2019/04/articles/department-of-defense/governments-playbook-negotiating-techniques-rule/“Internet of Things” Guidance to be Added to Cybersecurity Requirements for Agencies and Federal Contractorshttp://feeds.lexblog.com/~r/GovernmentContractsBlog/~3/WJapNfDV2QI/
https://www.governmentcontractslawblog.com/2019/04/articles/cybersecurity/internet-of-things/#respondMon, 29 Apr 2019 22:45:18 +0000https://www.governmentcontractslawblog.com/?p=3280Continue Reading]]>In 2019, cybersecurity has become top-of-mind for most federal government contractors and agencies that share sensitive information. In addition to updated Department of Defense guidance and procedures for evaluating contractors’ compliance with cybersecurity requirements, as well as an increase in Department of Defense cybersecurity audits, the Federal Acquisition Regulation (FAR) council also has promised a new FAR clause that will require compliance with NIST SP 800-171 security controls for civilian agency contractors that receive or create Controlled Unclassified Information (CUI).

To date, the cybersecurity regulations directed at federal government contractors and their subcontractors focus on implementing safeguards to protect sensitive government data. However, a gap in coverage has emerged where contractors provide the federal government with devices that are part of the “Internet of Things.” These devices connect to the Internet and are capable of collecting, sending, and receiving data – and thus are susceptible to hacking and listening in.

Proposed legislation recently introduced in both the Senate (S.734) and the House (H.R. 1668) calls for new information security standards to manage cybersecurity risks for Internet of Things devices sold to government agencies. This legislation would affect a wide range of devices – an “Internet of Things” device is generally defined as any device connected to the internet that is not a “general purpose computing device.”

As a part of this legislation, the National Institute of Standards and Technology (NIST) is being tasked with completing its review of considerations for managing the cybersecurity risks associated with Internet of Things devices by September 30, 2019. This review should cover, at a minimum: secure development, identity management, patching, and configuration management. NIST also is to propose recommendations for minimum information security requirements for managing cybersecurity risks associated with Internet of Things devices by March 31, 2020.

Additionally, within 180 days of enactment of the legislation, NIST is to publish guidance relating to “policies and procedures for the reporting, coordinating, publishing and receiving of information” on security vulnerabilities relating to devices used by the federal government, and resolution of those security vulnerabilities. This guidance will apply to federal government contractors and vendors. Any contractor or vendor for the federal government should take notice, as agencies will eventually be prohibited from acquiring or using devices from any contractor or vendor that fails to comply with this guidance.

What does this mean for you? While still in the early stages, this legislation likely will impact most, if not all, organizations in the Internet of Things space – either directly, where an organization provides these devices to the federal government, or indirectly, where an organization may use the NIST standards as a baseline for the security of its devices. We will be paying close attention to the developments with this proposed legislation. Stay tuned!

]]>https://www.governmentcontractslawblog.com/2019/04/articles/cybersecurity/internet-of-things/feed/0https://www.governmentcontractslawblog.com/2019/04/articles/cybersecurity/internet-of-things/SEC Issues Risk Alert on Customer Privacy Safeguardshttp://feeds.lexblog.com/~r/GovernmentContractsBlog/~3/SlmkbvVOQw4/
https://www.governmentcontractslawblog.com/2019/04/articles/securities-exchange-commission-sec/privacy-safeguards-reg-s-p/#respondMon, 29 Apr 2019 22:38:51 +0000https://www.governmentcontractslawblog.com/?p=3278Continue Reading]]>Earlier this month, the Securities and Exchange Commission (“SEC”) took a break from its recent focus on digital assets and the Best Interest fiduciary standard to publish a Risk Alert encouraging investment advisers and broker-dealers to revisit their policies and procedures relating to Regulation S-P (“Reg S-P”) (17 C.F.R. Part 248, Subpart A), which sets out requirements designed to protect customer information and records. The Alert highlights several key compliance issues identified by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) during exams completed in the past two years.

Reg S-P was adopted in 2000 to enhance financial privacy protections and stem the rising tide of unwanted solicitations. Among other things, Reg S-P requires investment firms to provide clear and conspicuous notice to customers regarding their privacy policies and practices when a customer relationship begins, and at least annually thereafter. It also mandates that firms deliver a clear and conspicuous notice to customers explaining the right to opt out of disclosures of non-public personal information to non-affiliated third parties. A 2005 amendment called for the implementation of written policies and procedures reasonably designed to safeguard customer records and information.

The recent Risk Alert focuses on three common areas of compliance shortcomings: (1) privacy and opt-out notices, (2) lack of policies and procedures, and (3) policies that were not implemented or reasonably designed to safeguard customer records and information. Most of the issues identified in connection with existing policies are technology-related. Curiously, the Risk Alert does not reveal how pervasive these shortcomings were.

First, OCIE staff found that firms either failed to provide the required privacy and opt-out notices altogether or provided notices that did not accurately reflect the firm’s policies and procedures or adequately explain the customer’s right to opt out of information sharing.

Second, examiners also found that firms lacked policies and procedures relating to administrative, technical, and physical safeguards, or had policies that were incomplete, containing blank spaces apparently left to be filled in at a later date.

The issuance of the Risk Alert makes clear the SEC still has its eye on this tenured regulation, which has taken on renewed importance in a big data, tech-driven world. More than a decade after the agency enacted these requirements, firms handling customer information are expected to have policies that comply with the regulation both on paper and in practice. Corporate counsel should draw on the Risk Alert to leverage the OCIE’s cumulative industry-wide observations in assessing their firm’s own potential vulnerabilities, especially those presented by the dynamic use of technology in the workplace.

]]>https://www.governmentcontractslawblog.com/2019/04/articles/securities-exchange-commission-sec/privacy-safeguards-reg-s-p/feed/0https://www.governmentcontractslawblog.com/2019/04/articles/securities-exchange-commission-sec/privacy-safeguards-reg-s-p/Resurrecting the Spare Parts Bogeyman – A Refresher on Why the Government Gets It Wronghttp://feeds.lexblog.com/~r/GovernmentContractsBlog/~3/WdaokcVW68U/
https://www.governmentcontractslawblog.com/2019/04/articles/audits/spare-parts-bogeyman-refresher-x27/#respondMon, 29 Apr 2019 22:31:04 +0000https://www.governmentcontractslawblog.com/?p=3274Continue Reading]]>The April issue of National Defense Magazine brought a well-written article by Susan Cassidy and her colleagues at Covington & Burling LLP on a recent DOD IG report analyzing (and criticizing) spare aviation parts pricing, even though the report concluded that the contractor in question had complied with the Truthful Cost or Pricing Data Act. The article addresses the IG’s concept of a fair profit – which is abjectly divorced from reality – and it notes that the GAO has been conducting a study of spare parts purchasing with a promise of recommendations to improve transparency in this area. I commend the article to anyone who operates in the spares market and wants to know where the Government is heading in relation to spares pricing.

With the IG and the GAO injecting themselves – yet again – into the spare parts market and decrying the rapacious contractors who dare to sell at prices that the Government regards as outrageous (after all, why in the world would anyone think that a profit rate in excess of 15% on a firm fixed price contract was reasonable?) it seems like a good time to revisit the reasons why the Government’s periodic complaints about spare parts pricing are generally myopic and wrong. And so, because no criticism of Government contractors ever goes away forever, I offer for your consumption a refresher: the re-publication of a posting that I authored in November 2014, entitled “How Dare You Charge That for a Spare Part!” – The Untold Story of the X27 Interface Assembly” –

The pricing of spare parts has been a subject of Government criticism for decades. Pick up any DCAA or IG audit report relating to spare parts or any intra-agency memorandum on the topic and you will sense the dudgeon with which the Government reacts to the prices of those parts.

These criticisms are intended to, and often do, engender a similar reaction from commentators, bloggers, and ordinary citizens, who pen irate letters to the editor bemoaning the greed of the contractors who “hold the government hostage” in the spare-parts realm.

Let’s put a little context around this issue. One way to do that is with the saga of the “X27 interface assembly.” The X27, of course, does not exist, but – if it did – its life story might look something like this.

The X27 is a specialized assembly that mates key components of the QRS system that was introduced in the 1980’s. It was originally manufactured under a firm fixed price production subcontract, purchased by the prime contractor in bulk, and installed by the prime contractor in its integration of the system.

During the production of the system, the Government would occasionally approach the prime contractor for spare X27’s. The prime contractor would provide them from stock, priced on the basis of the bulk price charged by the subcontractor when producing the X27 in volume on a “hot” production line. With the exception of packaging and shipping, there was really no difference between the material price of the X27’s integrated in the system and the spare X27’s purchased by the agency.

Fast forward 30 or so years. The system is out of production. The X27 is out of production. The original subcontractor has gone out of business. The X27 tooling has long since been scrapped. The Government doesn’t know for sure whether it ever acquired rights in data with respect to the X27, because the records are ancient and the Government cannot find them. But the system is still in use and it needs to be maintained, and that means the Government needs spare parts. From where do they come?

Not from Home Depot – these are specialized assemblies with specific dimensions, tensile strength, and torqueing requirements.

Not from the system prime contractor – it is no longer making the system, so it is no longer buying X27’s in bulk, and its bulk stock was exhausted many years ago.

Not from the original subcontractor – it does not even exist anymore.

No, what the Government needs now is some enterprising supplier who can:

• Locate and license whatever intellectual property may be needed to do the job or be willing and able to expend the time and money needed to reverse engineer the X27;
• Fabricate the tooling needed to manufacture the X27;
• Establish a production line;

• Employ sufficient personnel and have sufficient processes and procedures to satisfy all Government requirements with respect to, e.g.,
• Pricing, in accordance with Part 15 of the FAR;
• Quality control;
• Testing and inspection.

Oh… and one other thing – the Government only wants one X27. That’s right – one – a/k/a uno, une, eins, or “1.” And the Government won’t commit to buying any more than that one lone eagle. It is hardly surprising that the newly manufactured X27 is orders of magnitude more expensive than those purchased long ago, in a galaxy far, far away. But, all too often, it is in that long ago galaxy that the Government’s institutional pricing memory is fixed. How many times, when reviewing a DCAA or IG audit report relating to spare parts, and reference is made to prior prices, do you see any discussion of:

• Who the prior manufacturer was?
• Whether the prior acquisition was off of a “hot” production line?
• What the volume of that prior purchase was?
• Whether the prior supplier was the OEM?
• Whether the OEM is still producing the product?
• Who controls the IP?
• What the supplier paid to obtain the IP?
• What it would cost to reverse engineer the product?
• Whether the tooling exists or had to be created for the acquisition?
• What quantity is being purchased now?
• What guarantee there is of any additional sales over which to amortize the non-recurring costs?

It seems to me that these are pretty important and relevant questions. If you don’t ask them, you don’t know the answers. And if you don’t know the answers, you cannot prepare a reasonable audit report. All you can do is offer baseless criticism. Last time I looked, movie critics actually watch the movie before writing their reviews. Maybe DCAA and the IG should follow that practice.

]]>https://www.governmentcontractslawblog.com/2019/04/articles/audits/spare-parts-bogeyman-refresher-x27/feed/0https://www.governmentcontractslawblog.com/2019/04/articles/audits/spare-parts-bogeyman-refresher-x27/VA Vendors Beware: Mind the Company You Keep; It’s Time for a Compliance Checkuphttp://feeds.lexblog.com/~r/GovernmentContractsBlog/~3/ygnjmozVak4/
https://www.governmentcontractslawblog.com/2019/03/articles/department-of-veterans-affairs/va-vendors-beware-compliance-checkup/#respondFri, 29 Mar 2019 15:26:17 +0000https://www.governmentcontractslawblog.com/?p=3267Continue Reading]]>Department of Veterans Affairs (VA) acquisitions are about to get a lot more attention – from the VA Office of Inspector General (OIG), the U.S. Department of Justice (DOJ), and possibly Congress, as well. The U.S. Government Accountability Office (GAO) recently published a report (GAO-19-157SP) updating its “High Risk List,” which lists 35 government agencies and programs that may be particularly vulnerable to fraud, waste, abuse, and mismanagement, adding “VA Acquisition Management” to the list of the usual suspects. If, as Aesop opined, “a man is known by the company he keeps,” then the VA has now joined a notorious group. VA vendors should be aware of this development, because any attempt by the VA to “get well” will likely come with heightened compliance obligations for VA vendors.

GAO noted that the VA has not conducted a comprehensive update to the VA Acquisition Regulations (VAAR) since 2008. The VAAR and related internal guidance instruct contracting officers how to conduct procurements, including how to apply contracting preferences, such as the “Veterans First” priority favoring small businesses owned and controlled by service-disabled and other veterans. The GAO report found that VA contracting officers are often unsure how to apply the Veterans First policy, especially in the wake of the 2016 U.S. Supreme Court decision in Kingdomware Technologies, Inc. v. United States. Moreover, much of the training the VA currently provides is inadequate and discretionary, leading to very uneven understanding throughout the VA.

In addition to inadequate regulations and training, GAO recommended the VA conduct a fraud risk assessment of the entire Veterans First program. GAO observed that VA contracting officers commonly fail to keep complete contract files or to exercise proper contract oversight, pointing to unmanageable workloads as a probable cause. Being overloaded may cause contracting officers to omit mandatory clauses in veteran-owned set aside contracts, and even when the appropriate clauses are included, VA contracting officers may not be separately monitoring compliance with critical requirements like the “Limitations on Subcontracting” clause. See FAR 52.219-14; see also 13 C.F.R. § 125.6. Compliance with “Limitations on Subcontracting” requirements is already a hot issue within the VA, with the VA issuing a June 2018 Class Deviation to help improve monitoring and compliance. See VAAR 852.219-74.

GAO’s report also highlighted as problematic the Medical Surgical Prime Vendor – Next Generation (MSPV-NG) Program that manages the product formulary from which VA medical facilities purchase supplies. The GAO report critiqued MSPV-NG as failing to meet its cost avoidance goals due to lack of stakeholder acceptance and utilization by medical centers. The report also noted that 20% of Veterans Health Administration contracting actions are done on an emergency basis, which is inherently more expensive for taxpayers, accounting for $1.9 billion in 2016 spending. The MSPV-NG Program is currently undergoing a major overhaul, which we discussed in a previous blog post (available here).

GAO’s report could prompt the VA OIG and DOJ to increase scrutiny of VA procurement contracts, leading to an uptick in investigations and enforcement actions against VA vendors. Current and prospective vendors should take this opportunity to review their VA contracts to ensure compliance, particularly with key clauses such as the “Limitations on Subcontracting” clause called out in the GAO report. Vendors may also want to tighten their internal compliance systems and training, both of which become highly relevant in the event of an OIG or DOJ investigation. Finally, the VA regulatory landscape is undergoing major changes that will likely accelerate in response to GAO’s recommendations, with the VA already implementing a full-scale (albeit incremental) update to the VAAR. It will be important for even long-time VA vendors to stay apprised of regulatory changes in the coming months and years.

If people are indeed known by the company they keep, please remember the Sheppard Mullin team is someone you want to have in your corner. Whether helping you design or update your federal compliance program, answering concerns about current contracts, or leading your response to a Civil Investigative Demand or federal subpoena, we can help. As Benjamin Franklin once said, “an ounce of prevention is worth a pound of cure.”

]]>https://www.governmentcontractslawblog.com/2019/03/articles/department-of-veterans-affairs/va-vendors-beware-compliance-checkup/feed/0https://www.governmentcontractslawblog.com/2019/03/articles/department-of-veterans-affairs/va-vendors-beware-compliance-checkup/OH SNAP! Supreme Court to Take on Meaning of Key FOIA Exemptionhttp://feeds.lexblog.com/~r/GovernmentContractsBlog/~3/3D76H8hSjk0/
https://www.governmentcontractslawblog.com/2019/03/articles/public-disclosure/oh-snap-foia-exemption/#respondFri, 29 Mar 2019 14:46:37 +0000https://www.governmentcontractslawblog.com/?p=3271Continue Reading]]>On January 11, 2019, the Supreme Court granted a petition for writ of certiorari over an Eighth Circuit decision involving Exemption 4 of the Freedom of Information Act (“FOIA”), which protects from public disclosure “trade secrets and commercial or financial information obtained from a person and privileged or confidential.” This marks the first time the Supreme Court has agreed to hear a case involving this important exemption.

The case – Argus Leader Media v. U.S. Department of Agriculture, 889 F.3d 914 (8th Cir. 2018), cert. granted, — S. Ct. —-, 2019 WL 166877 (U.S. Jan. 11, 2019) (No. 18-481) – involves a FOIA request made by Argus Leader Media, a South Dakota newspaper, to the U.S. Department of Agriculture (“USDA”), seeking the yearly Supplemental Nutrition Assistance Program (“SNAP”) sales figures for every grocery store participating in the program. SNAP, formerly known as the Food Stamp Program, is the federal aid program that provides food-purchasing assistance for low- and no-income people living in the United States. The USDA issues SNAP participants a debit-like card that they use to buy food from participating retailers. When a participant buys food using their SNAP card, the USDA receives a record of that transaction, called a SNAP redemption. It was the yearly totals of these redemptions that Argus sought in its FOIA request to the USDA.

The USDA refused to release the SNAP redemption data, citing FOIA Exemption 4. Argus filed suit, resulting in the trial court ruling in its favor. Although the USDA declined to appeal, Food Marketing Institute (“FMI”) – a trade group representing grocery retailers – decided to intervene and file an appeal to the Eighth Circuit. The Circuit Court affirmed the trial court’s ruling, finding the redemption information was not “confidential” information entitled to protection under the exemption. In so ruling, the Circuit Court applied the test first enunciated in the D.C. Circuit case of National Parks & Conservation Assoc. v. Morton, 498 F.2d 765 (D.C. Cir. 1974). Under this test, commercial or financial information is “confidential” for the purposes of FOIA Exemption 4 only if disclosure is likely (1) to impair the Government’s ability to obtain necessary information in the future; or (2) to cause substantial harm to the competitive position of the person from whom the information was obtained.

Before the trial court, the USDA argued the competitive position prong of the National Parks test applied. On appeal, the Eighth Circuit agreed with the trial court that the SNAP redemption data did not satisfy this prong. Specifically, although the redemption data could be commercially useful, the Circuit Court found that was not enough to show FMI’s members would experience a substantial likelihood of competitive harm. As to FMI’s argument that its members would suffer competitive harm from the stigma associated with SNAP, the Circuit Court found this argument to be speculative and not supported by any other evidence in the record. Finally, in a footnote, the Eighth Circuit addressed FMI’s argument that the National Parks test should be abandoned in favor of a standard that applies the dictionary definition of “confidential” as meaning “secret.” The Circuit Court rejected this argument, stating “[u]nder [this] reading, Exemption 4 would swallow FOIA nearly whole.”

It is this final point that could have the greatest implications on appeal before the Supreme Court. Government contractors – many of whom have no choice but to deliver confidential information to the Government in their proposals and under data rights clauses in their contracts – could gain a significant advantage in having their information more broadly protected from disclosure to their competitors should the Supreme Court reject the National Parks test in favor of a plain meaning definition of “confidential” as “secret.” If a plain meaning test were to prevail, agencies would be required to shield information that contractors keep secret from the public and from companies seeking to use the FOIA request process as a means of to obtain otherwise unavailable competitive information, without the Government having to demonstrate how disclosure would impair the Government’s ability to obtain necessary information in the future or cause “substantial” competitive harm.

The Supreme Court’s adoption of a plain meaning test also would eliminate the many jurisdictional divisions afflicting the application of the National Parks test. Particularly, some courts only apply National Parks when information is “required” to be provided to the Government, as opposed to when information is “voluntarily” submitted. What constitutes a “required” disclosure versus a “voluntary” submission in the Government contracting context is the subject of even further disagreement. The Supreme Court’s adoption of a plain meaning definition of “confidential” as “secret” would do away with these distinctions.

Regardless of how it ultimately rules, the Supreme Court’s decision in FMI is likely to affect the Government’s application of FOIA Exemption 4 for years to come. Consequently, Government contractors should stay tuned and track developments in FMI closely.

]]>https://www.governmentcontractslawblog.com/2019/03/articles/public-disclosure/oh-snap-foia-exemption/feed/0https://www.governmentcontractslawblog.com/2019/03/articles/public-disclosure/oh-snap-foia-exemption/“Nanny” Government Rebuffed in Prosecution of Former Barclays Traderhttp://feeds.lexblog.com/~r/GovernmentContractsBlog/~3/B0hZBuc75_E/
https://www.governmentcontractslawblog.com/2019/03/articles/white-collar/nanny-government-bogucki/#respondFri, 29 Mar 2019 14:34:17 +0000https://www.governmentcontractslawblog.com/?p=3269Continue Reading]]>Once again, the Department of Justice’s (DOJ) efforts to hold a trader accountable for misrepresentations made during negotiations met with stiff resistance from the courts. On March 4, 2019, Judge Charles Breyer of the Northern District of California granted Robert Bogucki’s motion to dismiss the indictment in the middle of his criminal trial, ruling that the Government failed to prove that Bogucki’s statements could not possibly amount to fraud because there is no expectation of truth in the discussions between Bogucki and his customer. Judge Breyer’s ruling parallels the Second Circuit’s highly publicized 2018 repudiation of the DOJ’s attempts to prosecute Jessie Litvak, a former bond trader, for similar misrepresentations made in connection with trading residential mortgage-backed securities.

In a 13-page opinion whose brevity suggests the Court’s impatience with the Government’s case, Judge Breyer summarily rejected DOJ’s contention that Bogucki, the former head of foreign exchange (“FX”) trading at Barclays PLC (“Barclays”) in New York, defrauded one of Barclays’ counterparties by manipulating the price of FX options ahead of that company’s unwinding of those options through Barclays. In acquitting Bogucki, Judge Breyer relied on the same logic used to overturn Litvak’s conviction and those of his fellow bond traders in 2018: in an industry known for posturing, puffery, and outright lying, the likelihood of defrauding a sophisticated investor in an arms-length transaction is virtually non-existent.

The transactions at issue stemmed from the counterparty’s 2011 acquisition of a $10.3 billion British company. UK regulations required the counterparty to certify that it had sufficient funds in GBP to complete the transaction. As a hedge against any drop in value of USD between the counterparty’s certification date and the acquisition date, the counterparty purchased £6 billion GBP/USD FX options (also known as “cable” options) from Barclays pursuant to the parties’ International Swaps Dealers Association (“ISDA”) Agreement. ISDA Agreements typically cover all over-the-counter derivatives transactions between a bank and its counterparty. Ultimately, the value of the dollar held and the counterparty did not exercise its options. The counterparty instead opted to “unwind” the options by (i.e., sell them back into the FX market) by selling them to Barclays, itself an FX market maker. The unwind would occur over several tranches and would be governed by the terms of the ISDA Agreement. Prior to and during the unwind, Barclays took short positions in cable options. In doing so, Barclays not only created a hedge for itself in advance of the massive repurchase, but also depressed the price of the cable options it had agreed to repurchase from the counterparty.

After a lengthy investigation, DOJ determined that Barclays traders had taken adverse positions to its counterparty during the unwind but then misrepresented and concealed this fact from the counterparty. As the head of Barclays’ FX trading desk, Bogucki interfaced with the counterparty regarding repurchasing the options. According to the January 16, 2018 indictment, Bogucki falsely assured the counterparty that Barclays would act in the counterparty’s best interest, would stay out of the cable options market until all of the counterparty’s tranches were sold, and inaccurately stated that Barclays did not have a short position in the cable options. Bogucki was charged with wire fraud and conspiracy to commit wire fraud for his misrepresentations.

At Bogucki’s trial, DOJ presented two theories of guilt. As summarized by the Court, “[t]he crux of the Government’s first theory is that Barclays received confidential information about [the counterparty]’s plan to unwind its options that was not revealed to other banks, and the sharing of that information created a duty of trust and confidence.” The Government’s second theory was that Bogucki affirmatively lied to Barclay’s counterparty, and that the lies were material and detrimental to the counterparty.

In rejecting both theories, Judge Breyer found that the ISDA Agreement, which expressly stated each party acted as a “principal (and not as agent or in another capacity, fiduciary or otherwise),” obviated any implied duties between Barclays and its counterparty. Judge Breyer further found that, regardless of whether Bogucki had made any misleading or false statements to the counterparty, there was no evidence the counterparty had relied upon or had reason to believe such statements. First, the counterparty’s own representative testified that he not only knew Bogucki was not always honest, but also that he himself “bluff[ed]” when speaking with Bogucki. In the context of such a relationship, Judge Breyer held no reasonable juror could conclude that the counterparty would be influenced by Bogucki’s “half-truths,” so they could not constitute the basis of fraud. Second, the short sales themselves amounted to nothing more than a common and legal practice known as “pre-positioning” designed to minimize Barclays’ risk in advance of repurchasing the options from its counterparty. DOJ’s own expert witness confirmed this understanding. Moreover, the government could point to no laws or regulations prohibiting such trades in the FX markets.

When he handed down his decision, Judge Breyer chided DOJ for “assum[ing] the role of nanny of the FX options market.” In his decision, Judge Breyer ruled DOJ overreached its authority by “pursu[ing] a criminal prosecution on the basis of conduct that violated no clear rule or regulation, was not prohibited by the agreements between the parties, and indeed was consistent with the parties’ understanding of the arms-length relationship in which they operated.”

Between this harsh commentary and the resulting dismissal, Bogucki is a significant setback for the DOJ. The decision calls out the Government for bringing a naïve understanding of market realities to its prosecutions. Going forward, in an industry well known for its lack of candor, the DOJ will be hard-pressed to establish fraud in connection with arms-length transactions between sophisticated investors.

]]>https://www.governmentcontractslawblog.com/2019/03/articles/white-collar/nanny-government-bogucki/feed/0https://www.governmentcontractslawblog.com/2019/03/articles/white-collar/nanny-government-bogucki/“Buy American” Updates: Trump’s Executive Orders, Government Reports, and Other Updateshttp://feeds.lexblog.com/~r/GovernmentContractsBlog/~3/wMu9e8rFu4U/
https://www.governmentcontractslawblog.com/2019/02/articles/country-of-origin/executive-order-13858/#respondWed, 27 Feb 2019 23:25:23 +0000https://www.governmentcontractslawblog.com/?p=3258Continue Reading]]>Few phrases sum up the Trump administration’s policy goals better than “Buy American.” We hear it in advertising; we hear it in the State of the Union; and we find it littered throughout government buying priorities. Here is a short primer on some recent developments out of the White House regarding the oft-invoked (and often misunderstood) requirement to “Buy American,” including a new Executive Order issued just last month.

New Executive Order 13858

On January 31, 2019, President Trump signed Executive Order 13858, “Strengthening Buy-American Preferences for Infrastructure Projects,” reemphasizing the executive branch’s policy preference (but not necessarily mandate) “to maximize…the use of goods, products, and materials produced in the United States, in Federal procurements and through the terms and conditions of Federal financial assistance awards.” This policy was expressed originally in Executive Order 13788, “Buy American, Hire American,” which President Trump signed on April 18, 2017. (Discussed previously here.), Executive Order 13788 directed federal agencies to “scrupulously” monitor, enforce, and comply with various “Buy American” laws.

At first glance, the new Executive Order 13858 does not seem to have many immediate ramifications for government contractors. Its mandate is largely aspirational, asking agencies:

To implement in the next 90 days plans to “encourage recipients of new Federal financial assistance awards pursuant to a covered program to use, to the greatest extent practicable, iron and aluminum as well as steel, cement, and other manufactured products produced in the United States in every contract, subcontract, purchase order, or sub‑award that is chargeable against such Federal financial assistance award.” (Emphasis added).

To submit within 120 days a report on their plans to maximize the use of products produced within the United States.

Essentially, the key “update” in this new Executive Order is that it provides greater granularity on the types of materials in which President Trump is most interested (e.g., construction materials such as iron, aluminum, steel, cement, plastic/PVC piping, glass, lumber), as well as the types of government programs on which he is most focused – not necessarily direct purchases through “procurement contracts,” but more particularly infrastructure and construction spending, much of which runs through State and local government spending money obtained through federal grant programs (including, for example, grants issued by the U.S. Department of Transportation, the Federal Highway Administration (FHWA), the Federal Transit Administration (FTA), the Federal Aviation Administration (FAA), etc.).

It is difficult to know if this latest policy “push” will remain aspirational (merely “encouraging” companies to “Buy American,” which will not immediately change any requirements), or whether agencies will implement new regulations to “encourage” by force. While the Trump administration has taken a clear hands-off approach to most regulatory regimes since 2017, it seems unlikely that “Buy American” requirements will be ignored, suggesting the regulations will change (eventually). But even more troubling is whether grant recipients will respond to the “encouragement” in Executive Order 13858 with a heavy handedness all their own. If State or local authorities start imposing ad hoc “Buy American” requirements on the simple premise that it will be better for the country at large (a debatable proposition, to say the least), then this Executive Order could presage a compliance nightmare for construction contractors and their suppliers.

Still, it is difficult to predict how quickly the effects of this new Executive Order will play out. While the Executive Order imposed deadlines arriving in May 2019, history tells us it seems unlikely that any definitive solutions will be implemented by that time. Executive Order 13788 (issued in April 2017), also asking agencies to assess what they should do differently to strengthen “Buy American” requirements, imposed timelines as well. That Executive Order was mostly a vision statement, coupled with a data call, requiring agencies to submit reports within two to seven months. Reports were submitted to the White House (well past the deadline, of course), but there has been no public action from agencies in terms of rulemaking or public notice in the Federal Register. (Interestingly, on June 6, 2018, a group of Senators led by Senator Debbie Stabenow (D-Mich.) introduced the Keep Buying American Act of 2018 (S. 3006), which sought to require federal agencies to release publicly the reports mandated by Executive Order 13788. The bill died in Committee. This is only one of many new bills introduced in Congress designed to strengthen the government’s “Buy American” obligations). Given the administrative drag in responding to Executive Order 13788, it is difficult to imagine any sort of binding effect of the 90 or 120 days set forth in the new Executive Order 13858. We suspect it will be well past the deadline before we hear anything from the various agencies, but we will continue to monitor developments as they occur.

The BAA establishes a preference for domestic end products – that is, products manufactured or produced in the United States – but (even though its name would seem to indicate to the contrary) the BAA does not impose an absolute requirement for the government to “Buy American.” The Act carves out certain exceptions under which agencies are not required to provide preferential treatment for domestic-origin goods. The GAO report grouped these exceptions into four categories: (1) products purchased for use outside the United States; (2) products procured from U.S. Department of Defense (DoD) “qualifying countries” (where certain Memoranda of Understanding between the DoD and 27 separate allied Ministries of Defense agree not to discriminate against foreign-origin goods; see DFARS 225.003); (3) products falling under the Trade Agreements Act (TAA) waiver, by which the BAA is waived pursuant to the terms in U.S.-signed international free trade agreements; and (4) products covered by other FAR and DFARS exceptions to the BAA, including: (i) the public interest (FAR 25.103(a)); (ii) domestic non-availability determinations (FAR 25.103(b)); (iii) where the government would pay an unreasonably high cost for the domestic end product (FAR 25.103(c)); (iv) commissary resale (FAR 25.103(d)); and (v) purchases of commercial information technology (FAR 25.103(e)).

As depicted below, the GAO ultimately determined that, for FY2017, the amount of foreign-origin end products purchased by the government amounted to only $7.8 billion, constituting less than 5% of the $196 billion total the government spent on end products. That statistic is diminished even further when compared to the federal government’s total $508 billion procurement spending obligation in FY2017 – foreign end products make up only 1.5% of that overall figure. Over 80% of the $7.8 billion in foreign-origin end products were products purchased by the DoD, either purchased for use outside the U.S. or from “qualifying countries.” The remaining foreign-origin end products were split between the two other categories: TAA waivers, and those falling under the other FAR and DFARS exceptions to the BAA (listed above). That the TAA waiver was among the smallest category of excepted purchases, at only $550 million, is somewhat surprising, given that it tends to be the most well-known exception to the BAA.

FEDERAL OBLIGATIONS FOR FOREIGN END PRODUCTS, FISCAL YEAR 2017

Interestingly, the GAO noted the possibility its conclusions were incomplete, given the data reviewed by GAO was incomplete. The GAO observed the Office of Management and Budget (OMB) is currently considering strategies to improve Buy American Act data – strategies that will, no doubt, be informed by the reports issued in response to the April 2017 Executive Order 13788 and other governmental pushes to implement President Trump’s “Buy American” priorities.

In the second part of the GAO report, the GAO determined there is significant variance between agencies in providing BAA training and guidance, largely due to differences in the training programs and materials various agencies use. For instance, DoD made a point to re-emphasize BAA training in 2017, committing to having 18,000 employees complete a BAA training course by September 2018. On the other hand, neither the Departments of Veteran’s Affairs (VA) or Health and Human Services (HHS) included BAA-specific training for their personnel, a deficiency the GAO recommended be corrected.

Conclusion

Overall, the GAO data indicates that, while BAA compliance remains a priority of the U.S. government and the Trump administration, requiring agencies to “Buy American” through traditional government contracts may have a minimal impact in the overall scheme of things (with the data seeming to indicate that there is only a $7.8 billion opportunity for domestic manufacturers). This realization may be why the White House has now shifted its focus to grant-related incentives under the January 2019 Executive Order 13858, which seems to be a much larger piece of the federal-spending pie. According to USASpending.gov, the federal government doled out over $755 billion in grant awards in FY2018. This is nearly 150% of the approximately $508 billion federal procurement spending in FY2017.

It goes without saying that contractors are well-advised to continue ensuring BAA compliance where required, closely monitoring country of origin requirements in their contracts, and then ensuring that the products purchased through the supply chain match the contract requirements. Going forward, there is a greater likelihood that contracting entities at all levels will increase their scrutiny of contractors’ country of origin certifications as a result of these recent policy updates, and not only will accurate and auditable “Buy America” certifications prevent potentially severe consequences for noncompliance, but they could also provide a distinct advantage when competing for contract and grant awards. We can only hope, however, that any new “Buy American” rules or regulations will be uniformly implemented (especially given the GAO’s recommendation to improve training government-wide), after giving the public plenty of opportunity to comment on the wisdom of the policy choices, instead of being implemented on an ad hoc basis as overzealous buyers implement their own sense of what the BAA should require in response to the President’s “encouragement.”

Be careful out there. And please let us know if we can help you navigate the ever-evolving “Buy American” maze.

]]>https://www.governmentcontractslawblog.com/2019/02/articles/country-of-origin/executive-order-13858/feed/0https://www.governmentcontractslawblog.com/2019/02/articles/country-of-origin/executive-order-13858/More Opportunities On the Horizon for Small Businesses Seeking to Sell Cloud Computing to the Governmenthttp://feeds.lexblog.com/~r/GovernmentContractsBlog/~3/WqeujHydAk8/
https://www.governmentcontractslawblog.com/2019/02/articles/cloud-computing/small-businesses-prime-contracts/#respondWed, 27 Feb 2019 22:26:54 +0000https://www.governmentcontractslawblog.com/?p=3256Continue Reading]]>Each year, the Government purchases more and more cloud computing from contractors. But while many small businesses can provide cloud computing, the current rules associated with small business set-aside contracts prevent agencies from awarding prime contracts with a large cloud computing component to small businesses.

Currently, a small business cannot subcontract more than 50% of the prime contract amount under a services contract to businesses that are not small. 13 C.F.R. 125.6. This “limitation on subcontracting” rule is intended to ensure contract awards are made to capable small businesses and to prevent “pass through” situations in which a small business is awarded a prime contract, but a large company ends up doing most of the work. However, in the cloud computing context, this rule has the effect of eliminating small business participation in IT service contracts with a substantial cloud computing component. Typically, a small business is not able to commit to a situation in which it (together with other small businesses, if needed) will provide more than 50% of the services under these contracts.

On December 4, 2018, the Small Business Administration (“SBA”) proposed a rule to lift restrictions associated with cloud computing. 83 Fed. Reg. 62516. The proposed rule suggests cloud computing be excluded from the limitation on subcontracting rule calculation altogether in cases where the small business will perform other services that are the primary purpose of the acquisition. Alternatively, SBA suggests cloud computing be characterized as a “product” (rather than a “service”), which would bring the non-manufacturer rule into play and allow SBA to issue broad waivers of the rule. A waiver of the non-manufacturer rule would allow a small business to provide products it did not manufacture from both large and small businesses. Thus, if the proposed rule becomes effective, small businesses will be limited in subcontracting only with respect to the portions of an IT service contract that do not involve cloud computing.

The SBA’s proposed rule is a very welcome proposal for many small businesses, which will see more contract opportunities and a broader range of IT services that they can provide to the Government. As the terms of the final rule may change, we will continue to monitor developments as they occur.